What Are Fiduciary Fees and How Are They Calculated?

A fiduciary is an individual or entity legally and ethically required to act in another party’s best interest. This legal duty applies to various roles, such as managing money or property for someone else. When a person accepts this responsibility, they must manage the associated assets for the benefit of the owner, not for personal gain. The compensation paid to a fiduciary for these services is known as a fiduciary fee.

These fees are for services rendered in roles like settling a deceased person’s estate or managing a trust. A fiduciary is entitled to reasonable compensation for performing their duties, and the process for determining the fee accounts for the work required to administer the assets.

Common Fiduciary Fee Structures

A common method for calculating fiduciary fees is a percentage of the assets under management (AUM). This structure is used for the ongoing management of trusts or investment accounts. For example, a 1% annual fee on a $1 million trust would result in a $10,000 payment. This percentage is often on a sliding scale, where the rate decreases as asset value increases. A portfolio under $1 million might be charged 1% annually, while portfolios over $5 million could be charged between 0.25% and 0.5%.

Another common structure involves charging an hourly rate for services performed. This method mirrors how professionals like accountants or attorneys bill for their time and is suitable for tasks outside of ongoing management. Hourly rates for professional fiduciaries range from $150 to $500 per hour, varying by geographic location and expertise. This approach is often used for specific, time-bound projects or consultations.

A flat fee provides a single, predetermined charge for a specific service. This structure is best for well-defined tasks, such as handling a straightforward estate settlement or a one-time financial plan. A flat-fee arrangement offers clarity for the client, with rates for a comprehensive plan often falling between $2,000 and $7,500. This model is ideal for clients who need targeted advice without requiring continuous oversight.

Application of Fees in Common Fiduciary Roles

Fee structures are applied differently depending on the fiduciary role. For an estate executor tasked with administering a deceased person’s estate, compensation is often determined by state law as a percentage of the estate’s value. These statutory fees are calculated on the gross value of assets like personal property and real estate. The executor’s duties covered by this fee include inventorying assets, paying the decedent’s debts and taxes, and distributing the remaining property to beneficiaries.

In the context of a trust, trustee fees are most commonly based on the AUM model for the continuous management of assets. The specific terms for compensation are detailed within the trust document, which serves as the guide for how fees are calculated. Trustee fees might range from 1% to 2% of the trust’s assets annually. If a trustee performs a special task outside of normal duties, such as overseeing the sale of a unique property, they might charge an additional hourly fee for that service.

Factors Influencing Fee Reasonableness

Several factors are considered when determining if a fiduciary’s fee is reasonable:

• The complexity and size of the trust or estate. Larger and more complicated estates naturally require more work and justify higher compensation. For instance, managing a portfolio of rental properties is more demanding than overseeing a simple savings account of equivalent value.
• The time and labor involved. A fiduciary must be able to demonstrate that the hours spent were necessary for the proper administration of the assets.
• The skill and experience of the fiduciary. The level of judgment the fiduciary brings to the role influences the fee. A professional with specialized expertise, such as an attorney or CPA, may command a higher rate than a non-professional.
• The responsibilities and risks assumed. Managing assets with high volatility or significant legal risks can warrant greater compensation. Local customs and statutory fee schedules also provide a benchmark for what is considered reasonable.

Tax Deductibility of Fiduciary Fees

Fiduciary fees are paid directly from the assets of the trust or estate and are typically deductible on the entity’s income tax return. This deduction is claimed on IRS Form 1041, the U.S. Income Tax Return for Estates and Trusts. The ability to deduct these fees reduces the overall taxable income of the estate or trust, which can directly benefit the beneficiaries by increasing the money available for distribution.

While rules regarding miscellaneous itemized deductions for individuals have changed, fiduciary fees remain deductible at the entity level. This applies to costs paid in connection with the administration of an estate or trust that would not have been incurred if the property were not held in such an entity.